Question

E6-4 Analyzing Changes in Price, Cost Structure, Degree of Operating Leverage [LO 6-4, 6-5]

Cove’s Cakes is a local bakery. Price and cost information follows:

Price per cake	$	14.91
Variable cost per cake
Ingredients		2.18
Direct labor		1.08
Overhead (box, etc.)		0.29
Fixed cost per month	$	3,748.80

Required:
1. Calculate Cove’s new break-even point under each of the following independent scenarios: (Round your answer to the nearest whole number.)

a. Sales price increases by $1.40 per cake.



b. Fixed costs increase by $485 per month.



c. Variable costs decrease by $0.34 per cake.



d. Sales price decreases by $0.30 per cake.



2. Assume that Cove sold 345 cakes last month. Calculate the company’s degree of operating leverage. (Do not round intermediate calculations. Round your answer to 2 decimal places.)



3. Using the degree of operating leverage calculated in Requirement 2, calculate the change in profit caused by a 13 percent increase in sales revenue. (Round your final answer to 2 decimal places (i.e. .1234 should be entered as 12.34%.))

Answer 1

Break even point = fixed cost/ contribution

Contribution = sale price - variable cost

a) break even point = 3748.8/ ( (14.91+1.40) - 3.55)

= 294 cakes

b) BEP = 3748.8+ 485 / (14.91 - 3.55)

= 373 cajes

c) BEP = 3748.8 / (14.91 - (3.55 - 0.34))

= 320 cakes

d) BEP = 3748.8 / ((14.91 - .30) - 3.55)

= 339 cakes

2.

Sales (345* 14.91)	5143.95
Variable expenses (345* 3.55)	1224.75
Contribution (sales - variable)	3919.20
Fixed cost	3748.80
Net operating income	170.40

Degree of operating leverage = contribution / net operating income

= 3919.20 / 170.40

= 23

3. Change in profit = degree of operating leverage * expected increase in sales

= 23 * 13%

= 299 % increase in profit

= in dollars in increase would be 170.40 ( current profit) * 2.99

= $ 509.49

=